The Economic Formula Driving Progress Across the Energy Transition

Achieving the energy transition requires an enormous investment, and while progress has been made, we all agree that there is much more to do. The world is projected to fall short of its COP28 goal to triple renewable energy capacity by 2030 and keep global average surface warming below 1.5 degrees Celsius.

Despite demand for fossil fuels remaining high, the energy transition continues to advance. With trade tensions rising, geopolitical relationships unstable, and interest rates still elevated, now is a crucial time for governments, investors, and companies to come together to address – and invest in – the energy transition.

The Formula for Advancing the Energy Transition

The economic formula for the energy transition and the adoption of new renewable technologies is theoretically simple. Investment leads to innovation, which we then pair with validation. Validation ensures that a given technology can stand up to real-world conditions and scale at a reasonable deployment level, which helps reduce the risk for new investors to enter the field. This drives cost reduction and further innovation, which attracts more investment. The demand also reacts to the attractive cost – especially when aided by incentives – encouraging adoption of new technologies and driving returns for investors. A virtuous cycle repeats.

For this to happen, we must move with urgency, establish the correct conditions, and continue closing the gap between theory and reality. It’s also important that the right market incentives are in place – for instance, we have seen investors increasingly encourage companies to comply with their energy transition commitments. What’s more, financial incentives are the most influential factor for reducing a company’s carbon footprint, particularly when these incentives help reduce the cost of purchasing and implementing solutions to reduce energy use.

A Cross-Sector Approach to Energy Investment

It is important to look at this multidimensional energy transition from different perspectives to best understand the role each stakeholder and sector plays. Successfully navigating the energy transition calls for an unwavering focus on innovation, finance, and validation. We’re also cultivating a strong understanding of markets, geopolitical issues, and their effects on investment.

To reach ambitious decarbonization goals by 2050, it’s clear that the solution lies in securing a diverse range of funding across corporations, tech investors, private equity, and infrastructure funds. Last year, global spending in energy transition hit $1.8 trillion, an almost 20% increase over the previous year and an 80% cumulative increase since 2021; however, we’re far behind the $4 to 5 trillion in annual investment that is required to maintain a net zero trajectory.

Clean energy investments, including investments in clean energy supply chain, continue to be a key priority when it comes to the energy transition, and for good reason. These investments target cost-efficiency, energy reliability, and sustainability, addressing the energy trilemma.

While the current economic conditions have impacted the investment appetite, private funding remains one of the most important inputs for reaching net zero goals. Even amid the uncertain macroeconomic climate, there are signs of light. For example, the Inflation Reduction Act (IRA) led to significant investments across sectors, with spending in renewable energy technology estimated at $3 trillion. Renewable energy generation is expected to represent 55% of the electricity generation mix by 2050. This is due in part to strong increases in investment for areas like clean hydrogen where global investment in hydrogen-related projects reached $34 billion in 2023 (up 146% from the year before), and offshore wind, where global investment increased by 79% from 2022, reaching a record $76.7 billion.

In a similar vein, China’s solar photovoltaic (PV) investment highlights how government policies can provide incentives and certainty to scale solutions. These examples are promising signs that geopolitical movement and support from the public and private sectors will help spur additional investment.

The Critical Link in the Formula

The IRA and the bipartisan Infrastructure Investment and Jobs Act (IIJA) illustrate how federal incentives and funding can enable more projects and increase the cost-competitiveness of new technologies. Compared to solutions that are fully commercialized and scaled, it’s harder to secure investment from private equity and debt providers for newer, smaller-scale technologies that may not yet be proven.

Case in point: The main reason that large-scale projects are brought online today is because companies provide the capital and address the risk themselves by investing from their own balance sheets. This is where increased validation will play a key role in driving critical third-party investments for sizable new projects.

When advancing the energy transition and scaling existing technologies, validation in new solutions and models will ensure these solutions are viable before they’re added to the grid.

Validation isn’t a future goal, we’re already doing it today. Our T-Point 2 facility is specifically designed for validating power solutions and is part of Takasago Hydrogen Park, the world’s first integrated hydrogen validation facility. Here, we develop and test technologies under real-world conditions to ensure operability before joining the grid, giving key stakeholders the confidence and security to invest in large-scale hydrogen solutions.

Validation is also a critical part of creating the right conditions for driving the investment we need to successfully achieve the energy transition.

At Mitsubishi Power, we focus on bringing stakeholders together to drive the development of new technologies, such as clean hydrogen. We couple that with expertise in validation, which demonstrates how companies can embody a multidimensional approach to meaningfully advance the energy transition. We can then partner with our customers and other stakeholders to put these new technologies into practice, as evidenced by the Advanced Clean Energy Storage Hub in Delta, Utah.